We used to have fun commenting about the bond market, including Treasuries, Mortgages, Municipals, and Corporates. But that was before the dark times. Before deleveraging.
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Tuesday, October 20, 2009

In Friday's post on my 10-year trades, I got some great feedback. Keep it coming. I neglected to mention what my price goal and where my stop would be. I think if we push through 3.48%, the next significant support point is 3.71%. So that's my price target. I'll of course be watching the patterns developing in the interim.

As for a stop out, I'm dangerously close already at 3.37%. I'm comfortable with the fact that I may take several small losses before I finally hit my big gain. I think that's part of trading.

One commenter specifically suggested that I should have waited for an actual breech of 3.48% before taking on a short. That's an extremely fair criticism. That would be the classic way to play the trade I described. I was being a little more aggressive due to my view that negative momentum had already been established. If I get stopped out, clearly it will look like I was a bit too aggressive.

If I am stopped out, I'll be looking to reset the short, not set a long. I don't like to trade against my fundamental view, which currently is bearish. So I'll most likely either be short or nothing in the near-term. Next week's new auctions could provide an opening for another short.

Last week I also suggested munis would likely stabilize. Indeed last week's backup is now looking like a correction rather than the start of something more serious. I've been hearing that the supply over-hang on syndicate desks has been reduced considerably.

However, something to watch. According to AMG, muni fund flows fell to $615 million last week, vs. a $1.8 billion the previous week. Weekly flows had been running in the $1.5 billion range pretty consistently for the last couple months.

Posted by
Accrued Interest

10 comments:

You say you’re comfortable with taking several small losses before hitting a big gain. I think this is exactly correct when it comes to macro trading. Interestingly, relative value / mean-reversion trading is exactly the opposite – you want to make lots of small profits and hopefully get out before a big loss hits. This difference in psychology is why very few RV traders can trade macro successfully, and vice versa. Of course I don’t quite know what your background is and so won’t presume to tell you what adjustments to make; but it’s useful information to keep in mind. Knowing your own psychology, as I mentioned before, is very important for successful trading.

Regarding this particular trade: your entry is 3.48, your exit target is 3.71, and your stop is 3.37. So you’re looking to risk 11bps to make 23bps. Personally I don’t think those are great odds unless you’re very very good at getting directions right. If I’m risking 10bps I would want to make at least 30bps and preferably closer to 40bps.

(I just reviewed my trade log from the mid-noughties and found that most of my trades risked 3bps to make 10bps – I was very much a short-term macro guy, not one to ride the medium or big trends).

Regarding the interplay between technicals and fundamentals: like you, I hate trading against my fundamental view. So for instance through all of 2005 and 2006 I was either flat or short, because my fundamental view was bearish. That said, the very best macro traders I know were invariably agnostic on fundamentals and indeed could turn on a dime: if the market didn’t confirm their initial analysis, they had no objection to going fully the other way. I’m still trying to acquire that particular mindset.

So, inspired by this ongoing thread, I spent a couple of hours this afternoon re-reading my old trading diaries and re-constructing a few trades. I found a couple of interesting things, which I had forgotten:

1. I realize with hindsight that I "played the range" far more often than I "played for a break". That makes sense; true sustained breaks are pretty rare. That also explains why my typical trade was for 10bps of P&L; range trades don't have much more juice in them than that. On those occasions when the market broke and I caught the wave, I would sometimes book 30+ bps though.

2. I also realize now how important "flow color" was in making my decisions. My diary is full of notes like these: -- "the market feels really panicky this morning" -- "I don't believe the hedge fund blowup rumors" -- "5s are chomping at the bit here" -- "this bund squeeze is overdone" -- "the long bond trades like junk, just need a couple big hits to send it lower"

So it looks like a lot of my trades depended on some sort of psychological backdrop for my technical analysis. No substitute for keeping your ears to the ground.

About Me

I oversee taxable bond trading for a small investment management firm. Opinions expressed on this website may not reflect the opinions of my employers. Strategies described here should not be taken as advice, and may not be the strategies being used for my clients. Take this website as the egotistical ramblings of a bond geek and nothing more. E-mail is accruedint *at* gmail.com or find on Facebook.